Depreciation and Amortization for the Fishing Industry
The Revenue Reconciliation Act of 1993 (P.L. 103-66) added section 197, which allows an amortization deduction with respect to the capitalized costs of certain intangible property that is acquired by a taxpayer and that is held by the taxpayer in connection with the conduct of a trade or business or an activity engaged in for the production of income. The amount of the deduction is determined by amortizing the adjusted basis (for purposes of determining gain) of the intangible ratably over a 15-year period that begins with the month that the intangible is acquired.
The term “section 197 intangible” is defined to include “any license, permit, or other right granted by a governmental unit or any agency or instrumentality thereof.” Thus, for example, the capitalized cost of acquiring from any person a liquor license, a regulated airline route, or a television or radio broadcasting license is to be amortized over a 15-year period. Consequently, the definition of an amortizable intangible can be interpreted to include a limited entry fishing permit.
This provision generally applies to property acquired after the date of enactment of the 1993 bill.
Capital Expenditures and Depreciation
Section 162 of the Internal Revenue Code (IRC) allows you to deduct all the ordinary and necessary expenses you incur during the taxable year in carrying on your trade or business, including the costs of certain materials, supplies, repairs, and maintenance. However, section 263(a) of the IRC requires you to capitalize the costs of acquiring, producing, and improving tangible property, regardless of the size or the cost incurred. The tax law has long required you to determine whether expenditures related to tangible property are currently deductible business expenses or non-deductible capital expenditures. Before the issuance of the final tangible property regulations on Sept. 17, 2013, [Treasury Decision 9636 ("final tangibles regulations")], your decisions were guided by decades of often conflicting case law, as well as administrative rulings on specific factual situations.
The final tangibles regulations combine the case law and other authorities into a framework to help you determine whether certain costs are currently deductible or must be capitalized. The final tangibles regulations also contain several simplifying provisions that are elective and prospective in application (for example, the election to apply the de minimis safe harbor, the election to utilize the safe harbor for small taxpayers, and the election to capitalize repair and maintenance costs in accordance with books and records).
Frequently asked questions are available to help you understand the regulations and simplifying provisions. If you do not elect or you are not eligible to use the provisions, then the information below is applicable.
Depreciable Life of a Fishing Vessel
Water transportation equipment such as barges, tugs, and similar water transportation equipment have a class life of 18 years and a MACRS recovery period of 10 years. Fish tender vessels and fish processing vessels are considered water transportation equipment and should also be depreciated over a period of 10 years. Fishing boats, however, used in one's fishing trade or business is generally depreciated over 7 years.
You can generally depreciate a net, pot, or trap in your fishing trade or business as 7 year property. However, if based on your own experience you determine that any of these items will not be used for more than one year in your business, you may be able to deduct the cost as a business expense.
Depreciating Fishing Nets
Fishing Nets are expected to last longer than the year they are placed into service; therefore, they are capital assets and require depreciation treatment. See Depreciating Fishing Nets
Fish Processing Equipment
Fish processing equipment includes items such as belts and screws, conveyors, bins, holding tanks, washes, climate control devices, screens, separators, automatic deheaders and filleters, waste product recovery systems, refiners, plate freezers, packaging equipment, and a large number of standard motors and power transmission systems.
It has been the long standing position of the Internal Revenue Service that fish processing equipment falls under the Asset Class 20.4 as food production and manufacturing equipment and should be depreciated over 7 years. Some taxpayers are erroneously treating these assets as "special handling devices," as described in Asset Class 20.5, and are depreciating them over 3 years.
A taxpayer's reliance on the economic life of the assets corresponding to the 3-year recovery period is unsupported since recovery periods are statutorily defined by class lives and do not correspond to economic lives. The fact that a taxpayer's fish processing equipment is species specific does not justify a shorter recovery period.
Special handling devices such as returnable pallets, palletized containers, boxes, baskets, carts and flaking trays used in a taxpayer's fish processing facility may be classified under Asset Class 20.5 and be depreciated over 3 years.